The inventory systems used in two different divisions of parts distribution at Norton Auto Supply (NAS), i.e. the Regional Distribution Centre (RDC) and Central Distribution Centre (CDC), are more of elementary stock management systems. The Stock system is planned as all the RDCs have been given a particular stock level three times as per their demand requirements and reordering has been fixed to a particular day of the week where it’s sold stock is replenished, however, any RDC cannot place order for any urgent requirements or in case of stock outs.
Moreover, the stock is controlled by having sufficient safety-stock in order to meet four weeks demand and two weeks demand at CDC and RDCs respectively. While considering the fill-rates of the two distribution divisions, it can be assumed that CDC is having four week safety stock while its order would be delivered to full requirements when its places an order regardless of the lead times, is to be 100%. This is due to fulfillment of complete orders every week and they are not assumed to be delivered in different parts. However, holding too much inventories can be expensive for NAS in terms of holding and storage costs.
Holding this much stock in the company’s storage houses like CDC and RDCs will surely require very high stock pile ups at the centers as NAS already has a product range of twenty thousand parts and for every part having large stocks can result in very high storage costs. Especially when the fill rates are low and high levels of stocks need to be stored in order to meet the demand for each of the RDC. This can further result in damage costs, handling costs, maintenance costs, etc. which will surely add up to the inventory costs which are currently considered as 26% of the total value of the inventory.
As per proposed policy, if the fill-rates of parts at CDC were to increase to 99% which means only 1% of the demand cannot be met if urgent order arises from RDC. If inventory can be maintained at 99% fill rate, then there would be fewer requirements for holding too much inventory as reordering can be done at quicker rates due to introduction of quick delivery through Federal Express. Even though when looking at the calculations it can be evaluated that there can be significant cost savings, although the costs of quick delivery around the city might increase, but still it may not be as costly as the cost of high safety stocks.
Similarly, the costs at RDC can also be reduced significantly if the proposed policy is to be implemented effectively as this would increase the availability of stock for end customers that will lead to better customer experience along with the quick delivery through FedEx. The costs incurred might be lower than the savings made apart from having high fill rates.
According to the new operations internee, Monica, the inventory system proposed is to reduce the fill-rates to 96% at RDC while giving the guarantee that the 3% of the shipments can be sent through overnight shipments using services of FedEx. This will be a new system of managing the inventory systems at Norton Auto Supply as these new practices will have to be implemented effectively if long-term benefits were to be exploited.
Analyzing the impacts of reducing lowering the fill rates at 96% determines that stock requirements would be less than what was previously held. This will also result in possibility of not fulfilling the customer’s order at the spot. This will eventually save the inventory holding costs as well as other costs associated to it. However, there might be an increase in the cost of delivering the parts to customers if there are extra orders over and above the inventory levels through overnight delivering service through FedEx………………………
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